Europe ETFs on Verge of Breakout or Selloff (HEDJ, EZU)

When prices rally to a major resistance level, two things will ultimately happen: The price will break out and continue to rally, or it will sell off at (or near) resistance as it has done on prior occasions. Many of the European ETFs are pushing at a resistance level in place since late 2015. While this is an important level, the price could move either way off of it.

WisdomTree Europe Hedged Equity ETF (HEDJ) hedges the currency exposure of investing in European stocks. Therefore, it moves differently than non-hedged European ETFs, like the one discussed next. The hedged ETF is in a downtrend going back to 2015, when it topped out at $68.72. It fell to a low of $45.83 in early 2016 and has since been making some upward progress. The ETF remains stuck below a resistance area between $54.52 and $53.91. The price was sent tumbling from that region in April and May, and is being tested again in August. The price action since February has created a large triangle pattern, with a breakout above $54.52 signaling a rally to $63.21 (height of triangle added to breakout point). That target is very close to the most recent swing high from November, $63.18.

If the price can’t ultimately climb through resistance, or if rallies above $54.52 but then quickly sells off again, the downside target is the rising trendline which extends back to February. That trendline indicates support in the $48 region, although that level will rise over time since the line is upward sloping. A drop below $48 ends the triangle pattern and indicates a drop to $39.31 (height of triangle subtracted from breakout point). $39 to $37.55 is a support region from 2011 and 2012.

iShares MSCI Eurozone (VGK) provides un-hedged exposure to European equities. The downtrend in this ETF began in 2014, from a high of $61.89. The area to watch now is $49 to $50.70. This is descending trendline resistance zone extending back to October. The trendline held up in April and June, sending the price plummeting to multi-year lows at $42.73. As of the August 24 close of $49.08, the ETF is right in that resistance zone again. A rally above the June swing high at $50.70 signals the downtrend is potentially over. The most recent down-wave will have been completely erased by the rally, and that is often a sign of a trend change. In that case, the upside target over the next year or so is $56.50 to $57.50. Resistance from the 2015 high of $58.51 is just above this target zone.

The trend is down in this ETF, despite the July and August rally. The downtrend indicates a selloff from resistance could develop. A drop below $48.50 adds credibility to that argument. In this case, the downside target is $43, just above the June low. Downtrends make lower lows and lower highs, so the next target is $42.25.

The Bottom Line

The European hedged and un-hedged ETFs have different patterns playing out, yet they are both at critical levels. A small move to the downside could send both ETFs tumbling, in line with the longer-term downtrends. On the other hand, if the price moves above resistance it signals that the downtrend is likely over, and over the next year prices could be considerably higher than they are now. Whether trading ETFs or stocks, risk only a small amount of account capital on any single trade.